Lazear Sees No Recession for U.S. Economy

From WSJ, Henry Pulizzi and John D. McKinnon write:

"The data are pretty clear that we are not in a recession," Council of Economic Advisers Chairman Edward Lazear told a meeting of editors and reporters from the Wall Street Journal and Dow Jones Newswires.

...

"I would be very surprised if the NBER, looking back at this period, would date this as a recession," Mr. Lazear said. There are even indications that revised first-quarter estimates would be slightly stronger than 0.6%. "The optimists seem to have been closer to right on that than the pessimists," he said.

Mr. Lazear's remarks follow optimistic comments on the economy by other administration officials this week. Treasury Secretary Henry Paulson, who has spearheaded the White House's response to the credit crunch in financial markets, said Tuesday that "the worst is likely to be behind us."

I must confess that I am amazed that Lazear can be so confident, given that we know that GDP is revised multiple times (see this post). In addition, we know that there are four series that the NBER places primary emphasis on, aside from GDP. (As noted previously, the President seems to be similary confident, despite the trajectory of these four key series).

Nonetheless, remaining focused on the national accounts does not necessarily make the case unambiguously stronger in Lazear's favor. Consider growth rates of final sales to domestic purchasers and final sales of domestic product, compared to GDP.

Figure 1: Quarter on quarter growth rates of real GDP (blue), real final sales to domestic purchasers (red), and real final sales of domestic product (green), SAAR Ch.2000$. Growth rates calculated as log differences. NBER-defined recession shaded gray. Source: BEA NIPA release of 30 April 2008, and NBER.

What the real final sales series indicates is that taking out inventory accumulation yields a negative growth rate in Q1. It is of course possible that the observed inventory accumulation was in anticipation of resumed growth in Q2. The alternative interpretation is not so benign; it was that firms overestimated demand in Q1.

The real final sales to domestic purchasers series highlights a separate concern -- namely that GDP growth has been sustained by now-waning external demand. Recall, final sales to domestic purchasers is:

Where Y is GDP, EX is exports, IM is imports, C is consumption, I^Inv is inventory investment, I^Fix is business fixed investment plus residential investment, and G is government spending on goods and services.

As the figure clearly illustrates, the contribution to GDP from net exports is now much less pronounced than it was in 2007Q3. This point can also be seen in Jim's post on the release. We'll know a bit more about Q1 net exports when March's trade figures are released this Friday.

So, in this sense, the decoupling hypothesis is no longer academic. Whether US GDP growth remains positive may hinge crucially on whether rest-of-world growth is durable.

Other commentary: ECRI in CNN, Feldstein in Bloomberg, Greenspan in Bloomberg, Ritholz in Big Picture (II), Ritholz in Big Picture (I).

Comments

[HARM]

The recession will officially be postponed until November, after which the GDP data will conveniently be revised sharply downward --along with those ridiculous BLS "birth/death" employment numbers. It will then be proclaimed "obvious" to all that we had been in recession since at least the beginning of this year. At which point, the next President (and new Congresscritters) can have pinning the blame on their predecessors.

2008 May 08 04:54 AM

[User 30121]

What a crock! Those people with a brain, and a means to use it are now bent over a conveniently located trash receptacle and puking their lunch! This Lazear and Paulson are at best puppets, and at worse, liars! If we are indeed past the worst of it (economy croaking) then what happens to those 3.5-4 MILLION mortgages that are going into foreclosure in 2009 as a result of their interest resets? Is that just chump change, guys...to say nothing of the rest of the economy that is in the toilet, and the Chinese have their hand on the handle ready to push! Oh, gee, I forgot, Big Ben will just print more FUNNY money, right, Paulson? That will surely fix everything.

2008 May 08 04:33 PM

[Jason Rines (iThinkBig)]

Both of you are correct. Socialism will be used to continue bailing out the irresponsible which will delay an exacerbate a deep correction. The USA does not have nearly enough of the 'must have' products the global customer needs which are food and energy. The U.S. would do well to have an energy independence program, subsidize it with the $300 B they to drain Treasury on for the greedy or irresponsible with there suicidal mortgage bailout package.

The subsidies should go into two parts groups: Direct investment for nuke plants, biodiesel, coal, hydrogen and solar with demonstrably responsible investment banks to rapidly scale the infrastructure and bring the global investor back to the U.S.

Second group should be the SBA whom can provide loans through local and regional banks for entrepeneuars to create service level jobs.

Fixes the banking issue, deflates the commodities bubble, secures our nations long-term survival, creates millions of jobs, creates trillions of wealth where the USA becomes a massive raw energy materials exporter (along with a lot more AGR through decreased shipping costs).

Now, why won't this occur until we have already fallen over the cliff and probably in depression? Because Washington politicians are invested in big energy. Hard to pass laws when you get awsome inside information you and I would go to jail for if we obtained it...

2008 May 08 05:16 PM

[stubzee]

"I would be very surprised if the NBER, looking back at this period, would date this as a recession."

This is hilarious when you consider that Martin Feldstein, who is president of the NBER, the official arbiter of recession, said over a month and a half ago that he thinks we're in a recession.

Quoting a March 14 Bloomberg article now:
*
March 14 (Bloomberg) -- Harvard University economist Martin Feldstein said a six-year U.S. economic expansion has ended and the downturn could be substantially worse than past contractions.

``I believe the U.S. economy is now in recession,'' Feldstein, president of the National Bureau of Economic Research, said in a speech at the Futures Industry Association conference in Boca Raton, Florida. ``The situation is bad, it's getting worse and the risks are that the situation could be very bad.''
*

Guess Ed Lazear is in for a surprise.

2008 May 08 05:34 PM